5.2 New Models of Competition
As Box 1 highlights, promoting effective competition is central to the
achievement of Ofgem’s mandate. I believe that in the context of electricity and gas markets this has to be interpreted more widely in the future, beyond whether there is significant competition between existing large energy suppliers. As we noted in 4.1 competition has had important successes in the era of deregulation of electricity markets. However as we pointed out in 4.2 the current measures of competition seem less relevant in the coming era than they did in the past.
We have already suggested, in section 4.2, that where competition has
matured responsibility for monitoring how competitive the overall market is
should be shifted to the Office of Fair Trading and the Competition Commission.
Ofgem initially needs to focus on how vulnerable customers are being
treated within the competitive market. These are the consumers about whom it
should be concerned. Richer consumers in competitive markets who choose not
to switch should not be the primary concern of independent regulators. As pointed
out in section 5.1, it may be that a consumer advocate or the Consumer Protection
Authorities may be better placed in the longer run to take on this monitoring and
enforcement function.
The discussion of negotiated settlements in section 5.1 highlighted their
benefit in choosing which investments were necessary. However clear lessons also
exist from Argentina on the key role of competition in the tendering process for
investments, decided by negotiation, in network services. Argentina had an excellent
experience with this in electricity transmission, with active bidding for contracts
(Littlechild and Skerk, 2008). The tender price was then used as the basis
of the charges to be paid for the investment (akin to including it in the rate base).
In an age when investment is set to increase sharply, competition in the tendering
process for new investments, and the passing of any benefits from the tendering
process on to consumers will be a big issue. There is much more scope for encouraging
competition in the tendering market and then using these prices within price
control reviews. Argentina engaged in competitive tendering in sub-transmission
on investment blocks down to $2m (Littlechild and Ponzano, 2008).
Ofgem should also examine the barriers to new entry into generation,
energy services and heat networks. Competition between grid supplied electricity,
micro-generation and heat networks is something that may emerge in the future
(Patterson, 2007) and be an important disciplining force on incumbent companies.
A clear comparison exists here with fixed line telecoms where new technology has
emerged to create new networks and also to install parallel lines.
Such a radical view of the possible evolution of competition suggests that
serious consideration be given to the ownership unbundling of electricity distribution
networks from generation and retail, as this may be a key way to facilitate the
entry of energy service companies and heat networks, as well as facilitating negotiated
settlements. This again would parallel developments in telecoms where BT
has recently formally separated its retail and lines business, as part of an agreement
with the regulator Ofcom, via the creation of a lines business, Openreach.
As Box 1 highlights, promoting effective competition is central to the
achievement of Ofgem’s mandate. I believe that in the context of electricity and gas markets this has to be interpreted more widely in the future, beyond whether there is significant competition between existing large energy suppliers. As we noted in 4.1 competition has had important successes in the era of deregulation of electricity markets. However as we pointed out in 4.2 the current measures of competition seem less relevant in the coming era than they did in the past.We have already suggested, in section 4.2, that where competition has
matured responsibility for monitoring how competitive the overall market is
should be shifted to the Office of Fair Trading and the Competition Commission.
Ofgem initially needs to focus on how vulnerable customers are being
treated within the competitive market. These are the consumers about whom it
should be concerned. Richer consumers in competitive markets who choose not
to switch should not be the primary concern of independent regulators. As pointed
out in section 5.1, it may be that a consumer advocate or the Consumer Protection
Authorities may be better placed in the longer run to take on this monitoring and
enforcement function.
The discussion of negotiated settlements in section 5.1 highlighted their
benefit in choosing which investments were necessary. However clear lessons also
exist from Argentina on the key role of competition in the tendering process for
investments, decided by negotiation, in network services. Argentina had an excellent
experience with this in electricity transmission, with active bidding for contracts
(Littlechild and Skerk, 2008). The tender price was then used as the basis
of the charges to be paid for the investment (akin to including it in the rate base).
In an age when investment is set to increase sharply, competition in the tendering
process for new investments, and the passing of any benefits from the tendering
process on to consumers will be a big issue. There is much more scope for encouraging
competition in the tendering market and then using these prices within price
control reviews. Argentina engaged in competitive tendering in sub-transmission
on investment blocks down to $2m (Littlechild and Ponzano, 2008).
Ofgem should also examine the barriers to new entry into generation,
energy services and heat networks. Competition between grid supplied electricity,
micro-generation and heat networks is something that may emerge in the future
(Patterson, 2007) and be an important disciplining force on incumbent companies.
A clear comparison exists here with fixed line telecoms where new technology has
emerged to create new networks and also to install parallel lines.
Such a radical view of the possible evolution of competition suggests that
serious consideration be given to the ownership unbundling of electricity distribution
networks from generation and retail, as this may be a key way to facilitate the
entry of energy service companies and heat networks, as well as facilitating negotiated
settlements. This again would parallel developments in telecoms where BT
has recently formally separated its retail and lines business, as part of an agreement
with the regulator Ofcom, via the creation of a lines business, Openreach.
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